Taking a stand for standards

Taking a stand for standards

Recent regulatory developments and proposals have drawn criticism from many in the investment industry, who view them as a threat. But just as heat and pressure can form diamonds, such changes can produce a richer and stronger professional field.

This is the view of iA Securities Portfolio Manager John De Goey, a respected author and passionate advocate for ethical conduct and evidence-based advice. In this interview, he shares his journey through the industry, some takeaways from his latest book, and his thoughts on the future for financial advisors.

What convinced you to join the investment industry?
“Like perhaps most people in the business, this wasn’t my first choice. I originally wanted to work in government. I decided to transition to financial advice because I realized I had a transferable skill set (I did graduate work in economics, trade and competitiveness) and did a co-op work term at Consumer and Corporate Affairs in Ottawa.”

The first six years of your career were spent as a financial advisor in Equion Group. Can you talk about your experience at that time?
“It was a transformational time. I got a number of designations and was well-mentored by a fellow named Michael Nairne. My impression of the industry, however, was that it was dominated by people with a sales culture.”

In 2001, you adopted a business model that rejected products with embedded compensation. At the same time, you began work on The Professional Financial Advisor: Ethics, Unbundling and Other Things to Ask Your Financial Advisor About. What inspired you to do those things?
“I was convinced that there had to be a better way. In conversations with most advisors, I had to deal with a whole series of non-sequiturs and deflections about why people were doing things a certain way. I definitely did not get the impression that many advisors genuinely cared about their clients first and foremost… I decided to spell out the direction that I felt the industry should go in.”

You’ve described your time as vice president and portfolio manager at Burgeonvest Bick Securities Limited from 2005 until last year as a period when “I really came into my own.” What made you say that?
“My time at BBSL (before it was acquired by iAS) was transformational in that I was now at a truly independent firm where I was allowed to be more expressive. I got an opportunity to do some TV work while continuing to write for a few respected publications. The things that I had sketched out in my book (first published in 2003) were finally coming into focus and finally gaining some traction (i.e. a wider audience). My former CEO, Mario Frankovich, was helpful in keeping me focused and ‘on point’ when offering comments and in ensuring that my input was constructive… I think my time at BBSL was a sort of virtuous circle where I advocated for positive change and my practice grew simultaneously.”

You’ve re-released your book several times throughout the years: once in 2006, with The Professional Financial Advisor II: How the Financial Services Industry Hides the Ugly Truth, and again in 2012 with The Professional Financial Advisor III: Putting Transparency and Integrity First. What motivated those updates?
“The OSC passed the Fair Dealing Model on to the CSA around 2006; CRM was enacted in 2012 and CRM II is effectively being enacted as we speak. I really thought I wouldn’t be doing another edition after the third edition came out, but CRM II, the recent paper on banned embedded commissions, the Ontario Panel on Tailoring Financial Advice and the ongoing debates about a possible Fiduciary Standard (to name a few) told me that another update was necessary. Furthermore, so many advisors were moving to fee-based and discretionary practice models that the industry was obviously shifting even without regulatory reforms.”

The latest edition, The Professional Financial Advisor IV: Putting Transparency and Integrity First, was released recently. What are some of the most valuable takeaways readers can derive from this volume?
“Perhaps the most important takeaway is that advisors need to come clean about their motives and face up to their own biases. Most MFDA registrants, in particular, are like Henry Ford regarding new cars: you can have any product you like – provided it pays me an embedded commission. That is actually really far removed from being ‘independent’ and ‘client-centered.’

“The flip side of that problem is cost. Evidence is overwhelming that cost is a major determinant of performance (and certainly more reliable that past performance is – even Morningstar says so). We all need to behave like adults and face facts about the critical importance of cost… A big part of being a professional is accepting evidence.”

Finally, what advice would you like to share with other industry professionals?
“The financial services industry is going to be more like a profession in the near future. Anyone who still thinks and acts like a sales agent will not make the cut. For instance, anyone who refers to trailers as ‘trailer fees’ is deluding their clients, the public and worst of all, themselves. Trailers are commissions… If trailers were ‘fees,’ then how do you explain discount brokerages (who make new clients sign an acknowledgement that they will not be offering any advice at all) collecting them?

“Secondly, after you’ve acknowledged evidence and converted to more accurate, evidence-based terminology, you’ll need to quickly pivot and show clients that you’re on their side. That means making cost (not past performance) the primary driver of product recommendations. There’s a reason disclaimers, ads, prospectuses and fund facts documents say past performance can’t be relied upon.

“There are some advisors who won’t make the cut. I think this is a very, very good thing… If at some point (say five years from now) we had 25% fewer advisors, I think the general public would be very, very well served. For the 75% who ‘make the cut’, business will be better, more profitable and more professional than ever.”

Industry news

Investors had taken most of the summer off as the S&P/TSX stock index drifted aimlessly, trading between 15,500 in May and 15,000 at the end of August, but since then it has undergone a steep 7.5% increase. Of course for those investors who closely follow the market, it seemed to be moving in all kinds of directions, falling for a week, rallying for two and jumping about like a chicken on a hot tin roof the rest of the time